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Pyxus Stock Could Backfire Over the Longer Term

Here we go again. The latest, newest pot stock, Pyxus International (NYSE:PYX), is taking off. Pyxus stock has roughly tripled so far this year, with PYX stock gaining 37% on Monday based on, apparently, a single tweet.

We’ve seen this story before. Most recently, Tilray (NASDAQ:TLRY) took investors on a roller-coaster ride. Canopy Growth (NYSE:CGC) is up 400%+ from its 52-week low, thanks to an industry-changing investment from Constellation Brands (NYSE:STZ,STZ.B). Cronos Group (NASDAQ:CRON) went from $6 to $15 in a matter of weeks before pulling back.

I wouldn’t be surprised to see similar volatility in the Pyxus stock price, and the shares could potentially make some big gains. Pyxus’ story is intriguing enough that I expect many investors will be willing to look past the risks for some time to come. Admittedly, those investors just might be right.

The Story Behind PYX Stock

Pyxus is a different type of pot stock. Most of the publicly traded names in the sector essentially are startups; even Canopy, which looks like the most mature company in the space, is in that category. But Pyxus is a 140-year-old company with a real business behind it. Until this summer, the company was known as Alliance One. It acts as a tobacco middleman, connecting farmers and tobacco product manufacturers, including Philip Morris International (NYSE:PM). PYX’s 2018 revenue was $1.8 billion, and its adjusted EBITDA in fiscal 2018 was $170 million, according to a recent presentation by the company.

Pyxus’ pivot is different, too. It isn’t a struggling company jumping on the pot bandwagon like New Age Beverages (NASDAQ:NBEV). The company’s long history in tobacco would seem to give it an edge in the development of cannabis. Its “One Tomorrow” strategy includes moves into hemp, CBD oil, and vaping materials.

So this is a real story. That doesn’t guarantee the pivot will work, but at least investors can believe that Pyxus is making a sincere effort to capitalize on the growth of cannabis and e-cigarettes.

Pyxus Stock Soars on a Tweet

$PYX would not short…speculative long. Real management and tight float. The stock could double from here as long as investors are Cannabis crazy. Our favorite hire..and it wasn't last week. https://t.co/mPdfuGBVJe

It’s a sign of the optimism about pot stocks that a single tweet can move a stock 30%+ – and the tweet wasn’t even that positive. “Would not short…speculative long” is hardly a tremendously bullish call.

Citron Research is better known as a short-seller – Valeant Pharmaceuticals (NYSE:VRX) and Shopify (NYSE:SHOP) are among its more well-known past targets, but it has played this game before. Citron tweeted a bullish call on Tilray, which helped produce the massive rally in that stock.

Will PYX stock emulate Tilray? It’s possible, if not probable. Pyxus stock has a very thin float, with just 9 million shares available. Its history of profitability and established business model might draw in investors who see a stock like Tilray as far too early-stage and speculative. Like Citron, I certainly wouldn’t short PYX stock, even though the Pyxus stock price is up 200% this year. But that doesn’t mean I’d buy the shares, either.

The Risks of Pyxus Stock

There are two big concerns here. The first is the existing company. Alliance One stock until this year has been a very poor investment; even with its recent gains, it has risen 15% total since the beginning of 2000. One big reason is the company’s debt load. Pyxus closed its fiscal Q1 with $1.35 billion in debt, equaling roughly eight times its EBITDA. Even after the rally of Pyxus stock, its bonds yield as much as 10% on the open market.

At worst, that raises the risk of a restructuring if Pyxus’ efforts don’t pan out. In the meantime, Pyxus very well may take advantage of the elevated stock price to issue shares. That move could send Pyxus stock tumbling.

The second concern is that Pyxus is pivoting into areas in which it doesn’t have any real expertise and in which it doesn’t appear to have a competitive edge. On top of that, it only owns portions of the equity of most of its Canadian businesses.

So Pyxus is late to market. It doesn’t have full ownership of its opportunity in Canada. It may not have enough cash to fund the investments needed to grow those businesses, although the company has dismissed those concerns on recent conference calls. And owners of Pyxus stock could easily be diluted at some point.

Long-term, those are real questions. In the near-term, though, a “new” pot stock with an EV/EBITDA multiple around ten times and a 100-plus year history is likely to get investors’ attention. That’s what will matter in the near-term – and it’s why Citron is avoiding shorting the shares. But in the long term, there are enough concerns for value-minded investors to at least be very careful with Pyxus stock.

As of this writing, Vince Martin has no positions in any securities mentioned.